What Is the Difference Between a Lease & Finance?

by John Csiszar

Whether to buy or lease is sometimes a lifestyle choice.

The two main options for getting a new car, short of an all-cash purchase, are leasing and financing. In both cases, you walk onto a car lot, agree to make monthly payments and drive off with a car. However, the details of the two systems can be quite different. Depending on your financial situation and your objective in getting a new car, one may be more appropriate for you than the other.

Ownership

The primary difference between leasing and financing is in the ownership of the car. While you are financing a car, the lender holds a lien against your car. At the end of your payment term, you own the car free and clear. Every finance payment you make builds equity in the car and takes you one step closer to outright ownership of a paid-off asset. With a lease, you must return the car to the dealer when your lease ends, making every lease payment more like a rental payment. You do often have the ability to buy your car at the end of your lease, but the total cost will usually be higher than if you financed the car from the beginning.

Cost

For most cars, lease payments are cheaper than finance payments. Your lease payment essentially covers the depreciation of the car. In theory, when you return the car to the dealer you have paid the value that the dealer has lost. As a result, most leases have a mileage restriction. If you drive additional miles, you will owe additional money at the end of the lease as you have accelerated the depreciation of the car. With a finance payment, you are both paying off the depreciation of the car and buying equity in the car, generally making your monthly payment higher. However, there are no additional costs at the end of your finance contract. Additionally, when you finish financing your car, your payments are over. If you continually lease, you will always have a car payment.

Affordability

One of the main attractions of leasing a car is that you can generally afford a more expensive car by leasing than you can by financing. The typically cheaper monthly payment allows you to lease a car that may be too expensive for you to finance. An additional benefit of leasing is that you can get a new car every time your lease expires, which is typically around three years. If you enjoy the car you are driving, you might consider financing to have the edge, since you won't have to return the car to the dealer at the end of the payment phase.

Warranty Protection

Warranty protection is usually better when leasing rather than financing. Most car manufacturers offer significant warranty protection for the first three years of a car's life, which typically coincides with the length of a lease. When you finance a car, your maintenance costs are often higher because you will own the car outside of the warranty period. Cars also tend to have more expensive maintenance costs as they age. Whereas when you lease you will always have a newer car, when you finance you can end up with an older car.

References

About the Author

After receiving a Bachelor of Arts in English from UCLA, John Csiszar earned a Certified Financial Planner designation and served 18 years as an investment adviser. Csiszar has served as a technical writer for various financial firms and has extensive experience writing for online publications.